Molori and Newport Exploration Show why Ordinary Investors Hate Resource Shares
We need to face it; ordinary investors hate resource stocks. It’s one of those unspoken but obviously true facts that we wish to avoid thinking about or discussing. Because once you acknowledge that regular investors have virtually no exposure to resources, you also need to start questioning just why that seems to be true.
One cause is fairly simple to understand, the level of stupidity and cupidity in the industry is absurd given our need for new supplies of basic resources and the constant requirement for capital. The energy and mining sectors are capital intensive. No money, no mining.
I’m going to tell the story of what I think are two perfect examples of both stupidity and cupidity. One company has been an utter failure due to stupidity, the other a giant home run that from an investor’s point of view has been a total failure.
About eighteen months ago an IR person who I knew from another failed energy company who had moved on to greener pastures approached me. She pitched me on this dynamic young oil company that seemed to have a recipe for success. They had bought into a partnership with a much bigger oil company that was recompleting existing wells to increase production.
The initial story from the company was that they could recomplete 12-20 wells a month each adding 10-12 BOEPD. The company, Molori Energy (MOL-V), had gone from 40 BOEPD in May of 2016 to 400 BOEPD in May of 2017. I spoke to the president of Molori, Joel Dumaresq, and was impressed enough to buy a bunch of shares. If he actually would execute what he claimed, he could be running a billion dollar company.
I did notice that every time I talked to him, I had the uneasy feeling after I had hung up that I hadn’t been told the whole story. I should have listened to that feeling.
Time went on and I never heard any more about recompletions. As time passed the company seemed to be making a shift into drilling short shallow wells of low cost with the intention of fracking a known but undeveloped formation known as the Red Cave.
A neighbor of theirs named Adam’s Affiliates had drilled some 50+ wells into the Red Cave formation with an average of 55 BOEPD production. The shallow 1500 foot wells would cost about $300,000 each to drill but each flowing barrel of oil was worth $50,000 giving the company potentially a 900% ROI.
Then I was told Molori was partnering with a company to drill a first well into the Red Cave with results coming shortly. Months passed with no results. Every time I talked to Joel there was some slight change to what he had said before. Finally the results came out from the first well with plans for another well to be started shortly. By now they had amassed a 6,000-acre land package with up to 600 drill locations.
While I was becoming more uncomfortable each conversation with the constant changes in direction, I had sugar plum fairies flying around in my brain. I kept adding to my position.
Little did I realize that while I was being told Joel was in the energy business, behind the scenes, he was moving into the real estate business. Rather than the mundane business of drilling wells with a 900% ROI potential, if 600 drill locations from 6,000 acres was good, 3,000 drill locations from 30,000 acres would be even better.
The planned well was delayed. Then it was delayed more. At first Joel was telling me that his partner was dragging their heels, then after Molori had picked up a 100% interest in the project, the story became that he didn’t want to drill because with any success others would be bidding up the value of Red Cave ground. Every conversation with Joel was different than the one before or the one after. The story constantly changed and even I started to realize that I wasn’t being told the whole story.
The 2nd well was finally drilled. Remember, their neighbor Adams Associates was averaging 55 BOEPD in the Red Cave and Molori’s first well was a dismal 20-25 BOPD. In February of 2018 the company finally reported initial flow from the well at 28 BOEPD with “Peak production expected within the next ten to fourteen days, following which Molori will be providing definitive results.” We are now ten months past the initial flow results and we have no idea of what the stabilized flow from the well is because Molori refuses to say.
But the foray into the real estate business continues with an announcement in May of 2018 that Molori had entered into another deal to pick up 5,100 acres surrounding the Adams Affiliate’s ground. Then in July Molori announced they were in the process of arranging financing for both the 30,000-acre deal and their 5,100-acre deal and by the way they were suing their former partner.
The value of Molori shares hit a yearly high about a year ago at $.45. With the lack of progress on drilling and management constantly moving the goal posts, the shares have dropped 91% in a year. While Joel was farting around doing real estate deals that the company could not afford, shareholders were dumping shares with both hands.
Over the past fifteen years, I have lost the most money on what seemed to be the best deals. When Molori only owned 25% of the partnership, investors valued the shares at $.65 when they thought the company was in the oil business. As Molori did deal after deal, all contingent on finding financing, eventually picking up a 100% interest in something like 40,000 acres with thousands of drill locations, the shares dropped to a new low of $.04.
I realize now that I got lied to every single time I talked to Joel Dumaresq. There wasn’t any time that he ever spoke with me that he was candid about what his plans were or what progress was being made. Investors aren’t stupid and the market understood over the course of 2018 that he was all hat and no cattle.
The theory was simple and Adam’s proved it. Drill a shallow well into the Red Cave formation, frack it and get an average of 55 BOEPD with a 900% return. But Dumaresq wasn’t going to be satisfied with being a billion dollar company, he wanted to be a two billion dollar company or a five billion dollar company or a twenty billion dollar company.
When push came to shove, his people who had access to the data from 55 Adam’s wells couldn’t even do as well as Adam’s did on average in either of two wells. Molori was both a technical and practical failure. Now with a $1.6 million dollar market cap they have as much chance of some fool financing them as a snowball in hell.
If anything, my second example is more sorrowful for it is the story of a company with wild success who totally screwed their investors through sheer uncontrolled greed on the part of management.
In 2013 and before a company named Newport Exploration (NWX-V) had some money in the bank but nothing going on. They had a project of no particular merit and a royalty on an oil project in Australia that little was being done on. For 2009 there was a $10,000 royalty but none in 2010. In 2013 the partner company drilled and hit big. The figure for their 2.5% royalty shot up to $570,000 for just one quarter. The shareholders should have been in 7th heaven. Actually they should have been but they weren’t. Because the “management” of Newport didn’t feel it was worth telling their investors of their good fortune.
I did a good job of describing the rape of Newport investors in a piece I did in May of 2014. You should read it because you need to understand how a company goes all the way from basic rape into necrophilia in only four years.
I was under the belief that Ian Rozier and Barbara Dunfield had some limits to their greed. Refer to the piece I wrote in 2014 again to see just how greedy and shameless they could be. They literally screwed shareholders royally. But they aren’t through yet, they haven’t killed the company, they are just trying to.
Here’s the deal. This is a lifestyle company that does nothing that happened to buy a cheap lottery ticket that pays off about $4 million a year. When I wrote my piece four years ago, the share price was $.62 and they had 45 million shares. After getting tens of millions in revenue, now the company is a $.225 stock with 103 million shares outstanding. By hook and by crook but mostly by crook, Rozier and the rest of his robber band had handed themselves almost 60 million shares.
They do nothing for it. A wire is done once a quarter to them. You could do their financials on an IPhone with a $15 accounting program. They don’t even have to sign the back of a check, they get a wire.
For their service, Rozier and Dunfield have been collecting $38,500 a month. That’s $462,000 a year for the easiest part time job in the entire world. But the pair got bored; they had gotten away with highway robbery once, why not again? So in the April 2018 MD&A they slipped in a raise for themselves. So now they get $852,000 to split between themselves. That’s about 20% of the total amount the company will get in a royalty this year. That’s not just basic shareholder rape, that’s necrophilia. For a job that couldn’t take 30 minutes a month? Seems a bit high to me.
Resource shares are a lottery ticket at the best of times. We have guys who used to drive taxis who believe they should be running resource companies. There are those who think that since they once supervised a drill crew, they should run a chain of companies. 95% of resource companies are never going to catch the brass ring. But there should be some basic level of knowledge and experience.
For Molori, we could have accomplished a lot if we insisted the guy running the company be at least capable of tying his own shoelaces by himself. For Newport the standard should be higher, after all they did catch the brass ring. Perhaps the test should be the person running the company should at least leave one of the pennies on his dead grandmother’s corpse.
If we don’t give investors at least a fair shake, there won’t be any investors. Neither of these companies gave their investors a fair shake. The deck was rigged from the gitgo for both.
It goes without saying I don’t own shares in either company. I feel for the people who invested in Molori based on what I wrote. For what it’s worth, I took a big hit on the company as well. As far as Ian Rozier and Barbara Dunfield are concerned, I wouldn’t touch a company either was associated with, with a ten-foot pole.